Long-Term Planning Issues - Essay Example

Long Term Planning Introduction While there are many different functions which a manger needs to performfor effective management of an organisation, some are considered to be more essential than others. The four essential functions of management are planning, organising, leading and controlling. Out of the four essential management functions, planning is considered by Daft (2000) and Welch (2005) to be the most important for element for success while at the same time, individuals like Graham et. al. (2005) consider it to be the most contentious function of management due to our uncertain future. It must be understood that planning is done to achieve certain goals. Long term goals can specify where the organization would like to be a few years in the future. Goals are stated as the intention of the organization that are specific, measurable, cover key result areas, challenging, and should have defined time periods. For individuals and workers at a given company, the goals may be linked to rewards (Welch, 2005). At the same time, planning specifies the means for achieving the organization’s goals (Daft, 2000). However today’s businesses operate in a highly volatile environment and managers are concentrating more and more on short term results. The statement given at World Economic Forum correctly suggests that ‘Long-range planning is nowadays seen as an academic exercise’ and this is fast becoming a widely accepted truth. Nevertheless in the interest of business as a going concern, the validity of the statement and legitimacy of long range planning needs to be re-evaluated. This paper focuses on discussing the merits and demerits of long range planning and aims to answer if it still is a necessary exercise or merely an academic exercise which can be ignored if other functions of management continue to perform at or better than expected levels. Before such an analysis is undertaken, it is important to know why the focus on the short term results is so predominant. short term results Long term planning is getting more difficult and focus is shifting from it due to basic reason of increased volatility in the worldwide corporate as well as business environment. On top of that, the present financial community including stock/company analysts and mutual fund managers often evaluate the performance of many securities based on short term results. This means that a company presenting strong short term results can have its stock be given better performance reviews by peers. For individuals within the company, rewards such as bonuses, promotions and the like could also be linked with performance and profitability of a given one year period, therefore the short term gains take priority to such an extent that regular long range planning activities suffer. In a recent survey of more than 400 financial executives, 80 percent of the respondents indicated that they would decrease discretionary spending on such areas as research and development, advertising, maintenance, and hiring in order to meet short-term earnings targets and more than 50 percent said they would delay new projects, even if it meant sacrifices in value creation (Graham, 2005). This is a significant pointer towards the fact that the majority of players in the business environment are not looking to play a long innings but only looking for better positioning which helps them cut out the competition. In fact, competitive pressures are one of the factors which have changed the focus of the business community to look at quarterly or half yearly results and not worry about business decisions outcomes which will bear fruit in a period of 5 years. This can also be a cultural difference between east and west since the focus on short term gains has affected many more western businesses in comparison to Japanese businesses which often take a long term view and have multiple goals to achieve in many years such as market share, profitability and innovation. According to Dr. Irani, “The focus on short-term or quarterly results is a disaster (Irani, 2006, Pg. 1).” Why is long range planning essential? Organizational goals and plans which are based on said goals are associated with specific time horizons of short term, intermediate term or long term duration. For each given time period, different goals are defined such as operational goals, tactical goals and strategic goals. The further the time line is stretched, the broader the definition of the goals. Simply put, long-term goal helps the management set long-term direction for the business and in order to achieve the long term objective, long term plan needs to be established. Although this may seem like a simplistic exercise, it does require strategic planning and management as well as the development of all assets which a business can call on for support. Goals and plans help to facilitate an employee’s identification with the organization and help motivate them by reducing uncertainty while clarifying what they should accomplish over various stretches of time. As described earlier, the goal provides the ‘why’ of the company’s existence, where as the ‘plan’ explains to all employees how the management plans to gets to the given goals. Long term planning defines what actions will be taken by the company to achieve the goals which it has set out for (Daft, 2000). In the current global business scenario, a lot of managers are seen aiming for short term results and not focusing on any long term prospects for the company or for the employees of the company. Short-termism refers to the excessive focus of corporate leaders, investors, and analysts on short-term, quarterly earnings and a lack of attention to the overall strategy, business fundamentals, and business plan approaches to long-term value creation for the clients of the company (Krehmeyer, 2006). Such a trend is not good for companies since a heavy short-term focus combined with a total disregard for long-term strategy can tip the balance in destructive ways for company’s stake holders, and discourage long-term value creation and investment (Irani, 2006). Warren Buffett, the widely respected CEO of Berkshire Hathaway Inc., addressed the issue in his letter to shareowners in 2000 by encouraging the company’s management teams to place their attention and focus on long-term strategy, not quarterly earnings (Krehmeyer, 2006). Subsequently, even giant companies such as Coca-Cola, Gillette, and The Washington Post Company, ceased providing any quarterly earnings guidance and opted for annual projections of earnings and other financial data. This is certainly a step in the right direction which was followed by other companies in due course. More recently, Intel, McDonald’s, Motorola, and Pfizer joined the growing group of companies signalling their plans to scale back focused earnings guidance (Krehmeyer, 2006). This movement away from earnings guidance reflects a growing sentiment summarized by Bogle (2005) (founder and former CEO of The Vanguard Group), that the primary aim of any manager or management group should not be primarily concerned with the presentation of numerical targets or achieving earnings ratios but it should be to improve the operations of the company and enhance the long-term prospects of the organisation. If we take Germany’s Volkswagen as an example, the company set a practical goal to over take the Toyota Motor Company as the world’s number three carmaker and also place the brand on equally recognisable footings as Toyota. The plan to achieve the goal was to purchase the Swedish truck maker Scania adding heavy trucks to the product line of the company. In order to enter the ultra luxury cars market, Volkswagen acquire Britain’s Rolls Royce and produced a new V8 powered Volkswagen to compete with the Mercedes-Benz group. On the other hand, the goal of improving their product quality and to bring about design innovations and marketing innovations was more of a short/medium term goal based on competition and current market trends (Daft, 2000). Such combinations of long term strategy, medium term goals and planning are essential for any company which faces tough competition such as the automotive industry. Additionally, the rapidly changing environment of today means that businesses face different types on uncertainties which carry inherent risks with all of their business functions. Understandably, avoiding the uncertainties has forced the organizations to focus on short term results where risks are easily manageable and are often limited to difference between budgeted plan and actual results. However, as described in the example above, Volkswagen was faced with short term uncertainties but the company did not let such problems affect the long term strategy making process and the plan to overtake a giant such as the Toyota Motor Company (Daft, 2000). Contingency planning The uncertainties faced in both long term and short term planning can be mitigated via forecasting future events using numerical methods which have gained a strong foothold in planning process. Timer series analysis, regression analysis and historical trends were working well but seen to have completely failed with the oil shock of 1973 (Wikipedia, 2006). Presently, the focus moved towards ‘what if’ analysis which analyzes a range of alternative scenarios and their probability of occurrence so contingency plans could be developed for which ever of alternatives occurred. Contingency plans, sometimes referred to as scenario problems, define company responses to be taken in the case of emergencies, setbacks or unexpected conditions. For example, many companies in America got a rude awakening after the 9/11 attacks since they did not have any contingency plan in place to manage their company in case their primary location of business is lost. In contingency planning multiple factors are evaluated and the chance of their occurrence i.e. recession, inflation, technological developments and/or safety accidents. Contingency plans are sometimes referred to as Disaster Recovery Plan since they assume the worst case scenario for the businesses, however unlikely it might be. To minimize the impact of the worst case scenario potential factors are incorporated in scenario prediction matrices and steps to be taken are pre-determined which might include but not limited to layoffs, emergency budgets, restructuring or spin off parts of the company. Again, long term planning is important for any contingency planning since the two go hand in hand. Planning and Implementation As mentioned earlier, the focus of business has shifted to short term achievements and many managers would suggest that a business plan does not need to carry the vision of a long term future. Because of this the overall goal of the company is lost to a lot of its employees and one of the biggest reason for that is that planning starts and stops at the top (Welch, 2005). Planning should start from the ‘Goal’ of the company i.e. the mission statement. The mission statement is developed with the focus that the company is a going concern. Once the goal of the company is decided, it needs to be communicated at each level of employees in order to provide clarity of direction where the company is heading and inspiration to feel that they are part of something big and important. The initial plan should be developed with major milestones leading to achievement of company’s mission. Later onwards, the given milestones need to be broken down in smaller intermediate term goals and finally short term goals (Welch, 2005). It must be noted that the mission statement of the company will help in developing long term strategic plan to realize the mission. Long term strategic plan needs to be redefined into smaller tactical plans aiming for the strategy accomplishment and tactical plans need to be further broken down into simple operational plans to specify the action steps towards achieving operational goals which support the tactical plans (Daft, 2000). The plans once decided need to be implemented successfully. Implementation of the plans with correct direction would probably be the biggest challenge for the company. Successful implementation keeps an open door for flexibility and adaptability to changing environments. Different methodologies can be used for implementation such as management by objectives, implementation of single use plans or standing plans, implementation of quality plans and in case of need implementation of contingency plans (Welch, 2005). Management By Objectives (MBO) is a method whereby managers and employees define goals for every department, project and person and use them to monitor subsequent performance. Goal setting is probably the most important exercise in MBO as it forces all employees to answer the bigger question of what are they trying to accomplish in their position (Wikipedia, 2006). Based on the answer, Action Plan is developed which defines the course of action needed to achieve the stated goals. The action plan of an individual is integrated in the departmental goal which supports the company’s mission statement. After the individual action plan is implemented, periodic review helps in making sure the development is taking place and that the plan is on track. Final evaluation of goals and action plan is factored in the performance appraisal system linked with rewards (Daft, 2000). Single use plans are implemented for set of goals that are not likely to be repeated in the future. Contingency planning can be classified as single use plans where goal is to minimize losses and ensure continuity of business. Standing plans are implemented for tasks performed repeatedly within the organization. Quality planning is implemented – sometimes also referred to as PDCA (plan, do, check, act) cycle – for organizations where continuous improvement of product and service quality is the goal (Daft, 2000). New planning and implementation cycle guides to have a strong mission – which helps increase employee commitment and motivation, setting stretch goals – clear, compelling and imaginative to fuel progress, encourage learning environment and focus on making continuous improvements. As long as goals, planning and implementation are filtered down from mission statement short term plans and goals will not loose their focus (Daft, 2000). Conclusion As time passes, businesses are becoming mature, but at the same time the business environment is becoming more sensitive to even small changes. The term ‘maximizing shareholder value’ is probably being redefined as ‘maximizing shareholder value in the minimum possible time’. I feel that instant rewards are never without their associated costs, however hidden they might be, and companies are slowly realizing it. Japanese companies are probably the best example that long term planning pays off. Japanese car makers have followed the long term strategy of high quality, reliable vehicles and now dominate the market while American or European vehicles tend to be more fashionable or trendy but not as dependable (Irani, 2006). Mission statements and long term planning are essential for companies to differentiate themselves from competition, and to have a direction and track to grow. There is nothing wrong with short term gains as long as the plans are ultimately derived from the goal stated in mission statement and employees do not lose sight of the destination. The cases of Enron and Arther Anderson are prime example where short term plans that are not factored from long term strategy and goal can lead to demise of powerful companies. Word Count: 2,578 Works Cited Bogle, J. 2005, The Battle for the Soul of Capitalism, Yale University Press. Daft, R. 2000, Management, Dryden Press. Irani, J. 2006, `The Focus on short-term results in business is a disaster’, Initiatives of Change International, [Online] Available at: http://www.iofc.org/en/abt/newsroom/888.html Wikipedia. 2006. ‘Long Range Planning’, Wikipedia.org [Online] available at: http://en.wikipedia.org/wiki/Long_range_planning Graham, J., Harvey, C. and Rajgopal, S. 2005 ‘The Economic Implications of Corporate Financial Reporting’, Journal of Accounting and Economics, vol. 40, no. 1, pp. 3–73. Krehmeyer, D. et. al. 2006. Breaking the short term cycle. CFA Institute. Welch, J. 2005. ‘Winning’, HarperCollins Publishers Inc. New York. Read More